The Canadian P3 Model: Will It Work in the United States?

Despite his significant expertise with public/private partnerships (P3s) in the United States, Jay Hailey, an attorney at DLA Piper, found something new to share with attendees at the 2014 ULI Spring Meeting in Vancouver, British Columbia: the Canadian P3 model. Americans tend to use public/private partnerships as an umbrella term that covers a range of relationships between the private and public sectors, Hailey acknowledged as he introduced the session. The Canadian P3 model, however, is a very specific way to build and manage infrastructure, including public buildings. Moreover, a fourth “P”—performance—drives the Canadian model.

Taking the best practices and lessons learned from public/private partnerships in the United Kingdom and Australia, Canada developed a model tailored to its needs and culture. Initiated in 2002, the Canadian P3 model now is the primary means for 20 percent of capital projects, delivering 206 projects worth $70 billion in the last ten years, including education and health care facilities. As experience with the model grew, so did the number of companies wanting in on the game. Today, seven to eight companies bid on projects, squeezing margins and benefiting taxpayers.

Mike Marasco, CEO of Plenary Concessions and formerly of Partnerships BC, the entity set up by the province of British Columbia to oversee public/private partnerships, explained the Canadian model’s fundamental components.

First is the emphasis on government ownership of public facilities, avoiding some of the critiques that can accompany the so-called privatization of highways, utilities, and government buildings. The government sponsor awards the chosen developer a license to design, build, finance, and maintain the public facility for 30 to 35 years. Depending on the circumstances, the license may also include operations. In return, the developer receives—upon delivery—monthly “availability” payments. Unlike rent, the availability payments are tied to performance criteria. Penalties are automatically deducted every time a performance measure is missed.

Bundling long-term maintenance, including performance criteria, with the more typical design, build, and finance arrangements optimizes the “whole of life” (or life cycle) costs of the building, because, according to Marasco, “if a hospital has to choose between bandages and maintenance, bandages are going to win. Maintenance is deferred, with costly implications for long-run costs.”

The Canadian P3 model affects more than just avoiding deferred maintenance. Experience shows that considering performance and maintenance costs upfront improves the design and construction of the building, making it more resilient to start out with.

The success of the Canadian model has sparked interest south of the border. For a new country, a new name—performance guaranteed facility (PGF)—that avoids confusion with American “public/private partnerships” and emphasizes what makes these projects tick.

The state of California used the Canadian P3 model for the Governor George Deukmejian Courthouse in Long Beach. Although U.S. states have used a similar model for a handful of highway projects, according to Jeffrey Fullerton, the Long Beach Courthouse is the first public building PGF, incorporating “the full monty” of the Canadian model. Fullerton illustrated how bundling maintenance and operations with design, build, and finance can affect decisions: the 35-year time frame made hard-surface flooring preferable over carpet and the primacy—through penalties—that the sponsor put on having all courtrooms “available” for all users led to building 19 elevators.

The partnership is structured so that the public sponsor—in this case, the state of California’s Administrative Office of the Courts—has, in Fullerton’s words, “one throat to choke.” The state office deals solely with a special-purpose entity—the Long Beach Judicial Partners—set up to manage the project and the long-term license. Long Beach Judicial Partners manages all the other partners, contractors, and financial advisers, including Fullerton’s firm, Edgemoor Infrastructure and Real Estate.

Importing the Canadian model for one-off deals falls short of taking full advantage of Canadian experience. The founders of the WCX: West Coast Infrastructure Exchange are modeling it after another Canadian innovation—centers of expertise such as Partnerships BC. A corporation wholly owned by the province of British Columbia, Partnerships BC plans, delivers, and provides oversight for major infrastructure projects, including public buildings. They provide stakeholder management and create templates, tools, and a knowledge bank. They ensure that the private sector has a knowledgeable counter-party for negotiations. The single entity, moreover, speeds the adoption of innovations and best practices across sectors: courthouse PGF projects can learn from innovations developed in wastewater PGFs and vice versa.

The governors of California, Oregon, and Washington joined with Partnerships BC to create a U.S.-based center of expertise, and with seed money from the Rockefeller Foundation, launched the WCX in 2013. According to Chris Taylor, the organization’s executive director, the exchange is positioning itself around two opportunities: to attract “the patient capital waiting to come in” to the U.S. infrastructure market and “to better manage life-cycle costs.”

WCX is now working with the states to develop additional pilot projects. Taylor pointed to Oregon’s new law, HB4111, establishing a Public Infrastructure Commission that will screen infrastructure projects “to decide if PGF is the way to go.” With organizations like WCX and Oregon’s Public Infrastructure Commission, “public officials can have faith that someone smart is on their side,” said Taylor.

Expertise is crucial to a process where deals that are successful—for both parties—depend on risk assessment and risk management over 30 to 35 years. In addition, noted Marasco, pursuit costs are high, making the Canadian model most useful for projects exceeding $100 million. This all, warned Fullerton, requires “a tough bit of math,” and Taylor emphasized that “PGF isn’t suitable to too much decentralization.” But with the Canadian lessons in front of them and centers of expertise at their sides, the speakers at the ULI 2014 Spring Meeting session concluded that U.S. states have much to gain from advancing and shaping Performance Guaranteed Facilities into the California model, the Texas model, or the New York model.

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